By: Elaine E. Bedel - President , Bedel Financial Consulting

With consumer spending down and the auto industry in a bind, the government is offering you a tax incentive to buy a new car. If you purchase a vehicle between now and December 31st of this year, you can deduct the sales and excise taxes. Of course, there are a few qualifiers that you need to know about.

The American Recovery and Reinvestment Act of 2009 included a special sales tax deduction for the purchase of a new vehicle. Here’s what you need to know about whom and what qualifies.

What Vehicles Qualify?

• You must purchase a new vehicle. A used vehicle does not qualify.
• In addition to cars, the purchase of light trucks, motor homes, and motorcycles qualify.
• Purchase date must be after February 16, 2009, and before January 1, 2010.

How Much is Deductible?

You can deduct the state and local sales and excise taxes on a purchase price up to $49,500. For example, if the total deductible tax is 6%, then the potential deductible amount is $2,970 on a vehicle purchase equal to or greater than $49,500. If you purchase a $30,000 vehicle, the 6% tax provides a tax deduction of $1,800.

Who Qualifies?

• To be eligible to deduct the sales tax, modified adjusted gross income must be under $135,000 for single filers and $260,000 for joint filers. (A phase out of the deduction amount begins at $125,000 and $250,000 respectively.)

• The sales tax deduction is only available on 2009 tax returns; therefore, you must qualify based on your income for this year.

• You are not required to itemize deductions on Schedule A to take advantage of this sales tax deduction. This is an above-the-line deduction which means all eligible taxpayers, regardless of whether or not Schedule A is used, can receive the benefit.

What is the Deduction Worth?

Let’s assume that you qualify to deduct all of the sales and excise taxes based on your modified adjusted gross income and that your marginal federal tax rate is 28%. If the total of the state/ local sales tax and excise tax is $2,500, your income tax savings would be $700 ($2,500 times .28).

Summary

The objective of this tax benefit is to entice consumers to purchase new vehicles this year. The tax benefit along with the incentives provided by the car manufacturers and dealerships may encourage buyers to buy in 2009 instead of delaying a purchase to next year. However, if you are in the market for a vehicle, you will need to decide whether the income tax savings is enough to encourage you to purchase a new vehicle versus a less expensive used one.